Topic 10 PortfolioEvaluation

Topic 10 PortfolioEvaluation - Lecture 10 Portfolio...

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Unformatted text preview: Lecture 10 Portfolio Performance Evaluation Aaron Gubin FIN4504 2 Introduction Important questions: • How well has my portfolio done? • How well has a fund manager done? – Qualitatively evaluating fund managers 3 Introduction Two common methods: 1. Calculate past returns • Arithmetic average returns • Geometric average returns 1. Calculate risk-adjusted returns 4 Risk-adjusted returns • How can we measure returns? – – • How can we measure risk? – Standard deviation of fund returns: – Beta of the fund: – Tracking error volatility of the fund (TEV): P f r r- P benchmark r r- P σ P β p benchmark TEV=Standard deviation(r r )- 5 Measures of risk-adjusted performance • Sharpe measure: – For relative performance, compare to: P f P P r r S σ- = benchmark f benchmark r r σ- r σ P M Empirical CML f r P r P σ 6 Measures of risk-adjusted performance • Treynor measure: • Jensen’s alpha: P f P P r r T β- = ( ) P f P M f J r r r r α β =- +- r β P M Empirical SML f r P r P β 1 7 Measures of risk-adjusted performance • Information ratio: P benchmark P r r IR TEV- = p benchmark TEV=Standard deviation(r r )- 8 An Example Month Fund S&P500 T-bills Jan 1.0% 6.4% 0.2% Feb 3.8% 3.0% 0.2% Mar 4.6% 2.0% 0.2% Apr 5.1% 6.1% 0.2% May-3.2%-4.6% 0.2% P f P P r r S σ- = P f P P r r T β- = P benchmark...
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This note was uploaded on 12/03/2009 for the course FIN 4504 taught by Professor Banko during the Fall '08 term at University of Florida.

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Topic 10 PortfolioEvaluation - Lecture 10 Portfolio...

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